Starting in 2011, Canada Revenue Agency (CRA) has been going after the New Home HST rebate program for a few years now.
Many of the new home buyers intended to move into the new homes, but circumstances change in the few years of construction. Sometimes it is no longer feasible to move into the new homes anymore.
But, out of the many legal documents that we sign when we purchase the new homes, one of them is that we intend to move into this new place. This document allows the builder to apply for the New Home HST rebate on behalf of us and give us the credit.
Some builders may even refuse to sell the house to you, if you refuse to sign this document that will assign them the right to claim HST rebate on behalf of you.
A recent court case, Montemarano v. The Queen, 2015 TCC 151 (CanLII), between a taxpayer and CRA had been ruled. You can find out more about the case in this Toronto Star article.
The taxpayer was in a serious relationship with his then girlfriend and they were planning to get married. In anticipation of these life changing events, he bought a new house in Brampton in 2009, intending to move in once they got married.
The taxpayer moved into the house upon an extended closing in December 2010.
One of the criteria the court would look at is whether the taxpayer truly lived at the house or not. If the taxpayer simply “camped out” at the house with a tooth brush and a bed, CRA does not consider that as “living in” the house and hence would disallow the claim.
The taxpayer actually presented the evidence that he didn’t get any new furniture when he moved in. He simply got some used furniture from his parents, including a bedroom set, a dining table set and some glasses and cutlery. It might have appeared to be a temporary arrangement in the eyes of CRA, but the taxpayer’s argument was that he and his fiancé would have chosen new furniture when they got married and it was customary in his tradition to get used furniture from his parents.
Unfortunately he and his girlfriend broke up in March 2011. He subsequently listed the house for sale and incurred a capital gain of $130,000 in September 2011.
He designated the home as principal residence, sheltering the $130,000 capital gain, and he also got credited by the builder for the new home credit for over $27,000.
Canada Revenue Agency didn’t like it, challenging him that he was not genuinely intending to live in the house.
CRA argued that the taxpayer didn’t even have his CRA record, his health card and driver license address changed to the new place.
The law basically requires that the taxpayer to have the genuine intention to live in the house as his primary place of residence at the time when he purchased the property.
Justice Valerie Miller concluded in favour of the taxpayer based on the following analysis –
It isn’t always easy to prove genuine intention. Most of the time, it comes down to a reasonable and objective interpretation of all the evidence you can provide, such as utilities bill, correspondence between the taxpayers and other parties at the time when the transaction occurred, etc.
In this case, the taxpayer had only lived in the property for less than 9 months and he never changed the address of his driver license or any of his government records.
Make sure you speak to us when you are planning to sell a new home shortly after closing.
Until next time, happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Toronto Accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
It’s difficult for me to picture how I will be when this blog post is posted. My son, Bruce, will be a week old and I will be exhausted.
Last blog post, I discussed how we got ourselves ready for our first baby, Robin. We purchased a house and moved into our new home one month before she was born. Crazy, isn’t it?
People said getting married, starting a new family, moving and having a new career are the most stressful events in life. It is suggested that you should NOT do more than one of these events in one year. And yet we did all of them in one year!
Like most new parents, we had no idea what to do with the new born. I wasn’t expecting how difficult breastfeeding could be and how exhausting my body would become when taking care of a new born. We didn’t know much about sleep training or white noise machines. We let Robin guide us through the new parenting experience.
As little as I knew about being a first-time parent, I did know a lot about real estate, which meant I could prepare Robin for the future. We bought a house for her when she was 3 months old. We even secured homeowners insurance from a company like T.S. Peck Insurance.
We bought that house for her before we learned about swaddling and the white noise machine – both helped her fell asleep on her own and gave her five to six hours of sleep every night. If these hadn’t worked, it wouldn’t have been a huge issue, as I’d heard about Huckleberry, a great site that helps with sleep training for babies. It definitely is needed for those parents going through multiples stresses at once along with the sleepless nights, and perhaps I may have to use it for my newest son Bruce if the white noise machine is not successful in helping him sleep.
So when our expecting friends asked us how much we would put into the new born’s Registered Education Saving Plan (RESP), we told them we did nothing with the RESP.
Most RESPs in the market invest in mutual funds. We learned from Money Master the Game 7 Steps to Financial Freedom written by Tony Robbins that 96% of mutual funds don’t beat the market.
The majority of RESPs don’t make any financial sense to me.
The options to invest are limited. It is a registered plan and therefore is not allowed to invest in real estate directly.
The biggest return you get from putting money in the RESPs is to get a matching contribution from the government. However, you have to keep in mind that if your children do not go to qualified post-secondary schools, the government will take away the grant you get.
And of course, the grant will be taxed at your child’s hands and any return on investment will also be taxed at her hands when the money is taken out.
RESP contributions are not a tax deduction. Since you use after tax money to contribute to the plan, when your child takes out the original contribution to finance their education, no tax is paid on this amount.
This is equivalent to your initial investment in real estate. When you sell the house, you can take your initial investment out tax-free.
Now, back to our decision, we simply want to have this house to finance Robin’s post-secondary education. Who knows how much that would be in 18 years?!
All we know is that by the end of 18 years, without refinancing to purchase another property, this house will be mostly paid off.
All we need is to refinance the house, take out a portion of the equity for her education.
If we are lucky enough, there can be some appreciation on the house every year. For 18 years with 3% appreciation, this house can be worth $211K more than what it is worth today.
This house will also help her to fund her first house on her own. With detached Toronto houses worth over $1million today, it will be extremely difficult for the next generation to own a home by themselves. Unfortunately, that seems to be a trend everywhere. The younger generations are going to struggle to live in the future. House prices are constantly rising, meaning that people will have to settle for less in their first home. We’re lucky to have this current property to fund her first home when she’s older. As the house should be easy enough to purchase, she should only have to buy some other necessities before she can move in. For example, she’ll need to try and find an internet and phone provider when she moves into her first home in the future. She’ll probably end up using a company like Satellite Internet Now (view their website here). They should be able to provide her with an internet connection and a phone. Of course, there are other necessities too! However, we don’t need to worry about those necessities just yet.
You do have to start planning when they are young though! 3 months old seems to be a perfect age to start.
So my friend’s argument is that she doesn’t have enough money to buy a house today. I do agree, if you don’t have a sufficient down payment, putting aside the minimum amount to get the maximum match pay from the government is a great start.
Any savings are better than no savings at all. Tony Robbins’ book can attest to this!
Just make sure you are putting the money into the right type of RESP account, one that allows you to invest in the index funds, rather than regular mutual funds that charge you an astronomical amount of fees.
Until next time, happy real estate investing.
Cherry Chan, CPA, CA
The real estate accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
By the time you read this post, hopefully our new baby will have been born.
He’s our second child.
I still remember how busy we were trying to get ready for Robin’s arrival, our first child.
This time we are much calmer.
The first time around, we rushed to get insurance for our lives. We weren’t concerned about getting any type of insurance when we didn’t have kids. When we knew that we were having kids, first thing we did was get life insurance.
I am no insurance expert, but some of us would think that the insurance you get from work is sufficient. The reality is that most corporations that I worked for only provide life insurance up to 2 to 3 times of your annual salary. If you make $100K annually, the coverage is only $200K to $300K. Is that enough for your family if anything happens to you?
Insurance is like tax planning, it is very personal. Only you know how much is enough.
We are lucky enough to be eligible for a group plan offered to the members of our professional body. Chartered Accountants live long lives. Some of the members who have been in the policies have got money back! We signed up immediately for their term life insurance policy that would cover us up to age 85.
Unfortunately, most life insurance policies are not eligible for tax deduction. (If you are self employed and have a loan from the bank requiring a life insurance policy, you may qualify to deduct the insurance expense. Small businesses do have quite a bit of flexibility in terms of tax deduction. Consult us when you setup a life insurance policy.)
Second thing we did to get ready for Robin was to sell our 120 year old Victorian style home in west Hamilton, buy the biggest house we could afford for our family and prepared to move, boxes and brown packing tape at the ready!
The Hamilton house was nice for family without children. We could walk downtown in less than ten minutes. All the amenities are close by and within reach. It’s just that there were too many cars parked on the street. The way we renovated our Victorian home wasn’t baby friendly.
With my 6 month old belly and some help from our assistants, we packed everything away into our moving crates. We made the house spotless and we took off for a baby moon trip for 7 days. When we got home, we sold our house for $55K over asking. We thought the Hamilton market was crazy then. Hamilton real estate market is crazier now! Moving house is stressful enough without having to think of ways of transporting all your items from your old to the new house.
As soon as our house was sold firm, we were officially homeless.
Again, dragging along my 7 month old belly, I saw over 100 houses in 3 days in the suburbs from Ancaster to north Burlington. We couldn’t seem to find anything we liked within our budget.
We spoke to our long time mentor, who also bought a new place at the time to get ready for his second baby. He advised us to get as big a house as we could afford. He was regretted not having done that in the first place. He now had to pay for a premium to get an extra bedroom.
Keeping that advice in mind, we booked an appointment to see a four bedroom house that just came on the market. Asking price was $50K above our budget.
The house was well maintained, located on a cul de sac with a pie-shaped lot, big enough to accommodate a swimming pool. It also came with a separate entrance to a basement apartment. We felt that this was the house that we could grow into as a family. We knew this was the right house. We were right!
It was the second day of the listing. As we were leaving the house, we saw the listing agent waiting by the front door for the owners to come home to present an offer.
Great houses don’t last with the right price!
With the help of my belly, we told the sellers that we would do anything for Robin and we ended up getting the house.
Fast forward to today, 19 months ahead, the identical house down the street, not at the end of the cul de sac and not with a pie shape lot, was sold $80K above our purchased price.
It is more than 10% of appreciation in less than 2 years.
It’s all tax free!
And we are generating some cash flow from our separate entrance basement apartment unit!
Robin, who’s now 18 months old, is playing with other kids on the street everyday.
One of my best friends, who’s also a first time expecting mom, asked me when it would be the best time for her to move from her semi detached home in Brampton to a detached house in Burlington. I told her that the best timing is now.
It’s about the time in the market, not timing the market. Yes. Her house would get a decent amount of appreciation too, but unfortunately she would also need to pay for appreciation on the premium of having a detached house with one or more bedrooms.
And this appreciation is all tax free.
If we were to earn the $80K after tax money somewhere else, how many more hours do we have to work to get there?
And of course, this time around, we don’t have to move again for our second son. We already got a house big enough to accommodate our growth.
Until next time, happy real estate investing!
Cherry Chan, CPA, CA
The Real Estate Accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
When I said nothing, I really mean nothing. My uncle, Uncle John, who’s merely 7 years older than me, had nothing when he first landed in Canada.
It wouldn’t be far off if you use the term FOB (Fresh Off the Boat) to describe how he got to Toronto. He was trained to be an engineer on a cargo ship in a college in China. He is the youngest of 7 siblings from my mom’s side.
He just happened to arrive with his ship at a town in BC two hours north of Vancouver, shortly after my family moved to Toronto from Hong Kong.
With the small amount of pocket money provided by the shipping company that he worked for, he managed to take a cab ride to Vancouver and rented a motel to stay for a night. My mom was able to pay for his ticket at the time and he flew over to Toronto the next day.
That was over 15 years ago.
He had since worked as a bus boy in a local Chinese restaurant for years. He realized that job didn’t really have any future. He then worked as an apprentice in a HVAC company providing customers with tips to maintain your hvac. He progressed rapidly within the business too. With his background in machinery, he started his own HVAC business a couple years later. HVAC businesses are those that deal with issues of heating, ventilation and air conditioning, and companies like Rapid Repair Experts Cary, nc might be worth having a look at if you require any HVAC services. If you’re looking to start your own HVAC business, you might want to check that you know How Much Does It Cost to Get HVAC Certified. Once you know this, you will have a much better idea of whether you should start your own HVAC business.
Today, Uncle John is married and has two young boys. He owns three properties, combined of over $1.5M in value and a business that’s sufficient to support his entire family. He has more business than he can handle. He has to turn away some of our referrals.
Contrary to common belief, not every immigrant comes with money.
But if you work hard, have good ethics, are willing to take some risk, and put some savings aside, have a small business accountant as part of your team, you too can create your own Canadian dream.
As a real estate investor myself, we get so hyped up with buying the next investment property. We often forget about our own home, which is the biggest tax free asset that you can own in your life!
Believe it or not, $1 appreciation in your home is equivalent to $2 of rental income you earn (if you are at the highest marginal tax bracket).
Uncle John made some decent money from his business. He invested in penny stock and he invested in a small commercial unit in Scarborough thinking he would open up a store to attract more business.
He didn’t make a dime off any of these investments.
He is losing money every year at his commercial unit. He barely broke even on his penny stock investments.
He learned about real estate investment a couple of years after seeing a few of his friends accumulating tax free wealth by upgrading their homes every few years.
He bought a pre-construction home 3 years back. He just recently sold the property after staying there for a few years.
He made over $150K, using the biggest tax free asset a taxpayer is allowed from this property.
He finally made his decision to sell the commercial unit and liquidate all his penny stocks, putting everything he has in his principal residence to get a bigger and better home for his family. He decided, along with his wife, that the best way to do this was to build their own home with the help of a Toronto Custom Home Builder. This was, the house would be perfectly designed to meet their own needs and will last them much longer than a house they have just bought.
Time will tell whether this will be a good investment decision.
But as of today, he’s accumulated over $1.5million of asset in the last 15 years, starting from absolutely nothing.
The Canadian Dream can come true, with a bit of luck, a lot of hard work and a good Toronto accountant. 😉
Until next time, happy real estate investing.
Cherry Chan, CPA, CA
Real Estate Accountant
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.
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